[Editor’s note: this is one of an ongoing series of articles parsing and clarifying the tax reform commonly known as the Tax Cuts and Jobs Act. Previous articles are linked at the end of the post.]

Nearly everything involving taxes in our country has been acutely affected by the Tax Cuts and Jobs Act (TCJA). Unfortunately, owing and paying tax are still necessary and required in most cases, but on the other hand we are treading on new terrain for year-end tax planning. We will explore some actions taxpayers can make before the end of 2018 that can provide a tax benefit.

Itemized deductions

The only itemized deductions that have survived the TCJA are:

medical expenses in excess of 7.5% of adjusted gross income

state income and real estate taxes, limited to $10k

mortgage interest including home equity interest paid, subject to limits

charity

One of the most impactful changes to individual taxpayers is the limitation on state income tax and real estate tax paid (the so-called SaLT deduction) to $10,000. Many taxpayers, especially those in high-tax states, were itemizing their deductions primarily due to their state tax burden. Couple this limit with the drastic increase of the standard deduction ($24k for married filing joint taxpayers), and you will find most taxpayers will no longer itemize their deductions.

Tax planning points

Bunching deductions. If you have significant deductions that are just below the standard deduction, you might consider “bunching” your deductions, i.e. paying charitable contributions on January 1st and December 31st of year one, and then not making such contributions in year two. As a result, you will itemize deductions in year one and tax the standard deduction in year two, then alternate this method each year.

For estimated taxpayers, there is no more pressure to get your 4th quarter estimated state tax payment in on or before December 31st since you will likely already exceed the $10k cap, and therefore receive no benefit from paying the estimate two weeks early (they are due January 15th).

Sec. 199A – The 20% Deduction

To put individual taxpayers on more even ground with corporations that now have a 21% flat tax rate, the TCJA provides a deduction of up to 20% of income from pass-through entities. Depending on the income level of a taxpayer and the type of business that generates the income, this 20% deduction may be limited or altogether eliminated. We will discuss this provision in depth in a different article, but we will explore basic tax planning here.

Tax planning points

For s-corporation shareholders, consider adjusting owner’s salaries to maximize the deduction. If a taxpayer’s income is over the threshold and the business is qualified, the 20% deduction may be limited to 50% of the wages paid by the company. Since only the pass-through income and not the wages earned from the company get the benefit of a 20% deduction you would prefer the pass-through income to be as high as possible and the wages paid to be as low as possible. There is a sweet spot in the relationship between the wages and the pass-through income that will offer the optimal deduction assuming the owner’s compensation is still considered to be reasonable.

An alternate limitation is 25% of wages plus 2.5% of depreciable property. Taxpayers might consider making an investment in tangible property for the business before the end of the year, especially in partnerships or sole proprietorships where owners are precluded from paying themselves wages. There are also enhanced accelerated depreciation incentives in the new tax law that make this an even sweeter deal.

Gain Deferral – Qualified Opportunity Zones

An incredible tax deferral tool provided by the TCJA is the advent of qualified opportunity funds (QOFs) which are entities that invest in qualified opportunity zones (QOZs). QOZs are economically depressed areas that have been identified by state governments. The intention of the law is to spur economic investment in these depressed areas. QOFs may present an attractive option for taxpayers that have significantly appreciated property and would like to dispose, but do not want to pay tax on the gain.

Tax planning points

A taxpayer may defer paying tax on a capital gain, if they invest the gain in a QOF within a 180-day window. If specified holding periods are met, those taxpayers may receive a deemed step up in basis of up to 15%, thereby permanently eliminating tax on that portion of the gain. In addition, the appreciation on the investment in the QOF is not taxed if held 10 years.

Bottom line

Only two months remain in 2018, but that is enough time for savvy taxpayers to take advantage of some of the changes to the tax code… and these are just a few of the options available to taxpayers looking to decrease their federal tax liability. As always, consult with your advisor before taking it upon yourself to engage in any of these tactics. Everyone’s personal income tax situation is nuanced, and certain actions may not yield expected results.

An elusive tax cut for the middle class, opportunity zones, and high-stakes lotteries all take a back seat to an (allegedly) horrible, horrible human being who (allegedly) stole nearly $100K from the Girl Scouts of America and a cancer center. Not. Cool.

CPA Accused of Stealing Over $93,000 from Girl Scouts, Cancer Center. Most accountants are decent people. Embezzlement, fraud, and outright theft do occur, but these instances are statistically infrequent. This Los Angeles CPA has a lot of explaining to do. [Going Concern]

No matter who picks the winning numbers, the IRS is the real winner on Mega Millions and Powerball. With the Mega Millions jackpot at $1.6 billion and Powerball's top prize at $620 million, the tax bill will be hefty even if the winner employs strategies to reduce their taxable income. [CNBC]

What new tax cut?! Speaking with reporters in Nevada on Saturday, Trump said he was working on a “very major tax cut for middle-income people.” He said the White House and congressional leaders are “studying very deeply, round the clock” to create another tax cut “not for business at all” that will be announced on November 1 or sooner. … It’s not at all clear what Trump is talking about. [Vox]

The facts on taxes in 5 charts: a 2018 midterm report. Taxes, like death, are among the few certainties in life. The staff at Politifact decided to take a graphical look at both the new tax law and the broader landscape of taxation in the United States. Here’s what they found. [Politifact]

More on the opportunity zone tax break. The Trump administration, trying to accelerate tax-advantaged investment in low-income areas, offered generous definitions and rules Friday in a long-awaited package of regulations. [Wall Street Journal]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

After a three-month marathon session, many accountants breathe a sigh of relief at midnight on October 15. Once the realization sets in that the extended filing due date has passed, now what? Time to deflate and recharge is essential! The REM Cycle polled the staff of Raich Ende Malter and compiled the top 10 things that tax accountants will be doing on Tuesday, October 16, 2018.

We're walking for a cure.

An estimated combined total of 174,250 people in the U.S. are expected to be diagnosed with leukemia, lymphoma, or myeloma in 2018. New cases of these diseases are expected to account for 10% of the estimated 1,735,350 new cancer cases diagnosed in the U.S. in 2018.

Raich Ende Malter & Co. LLP is marching to help support research into life-saving blood cancer treatments by raising funds through the Leukemia & Lymphoma Society's (LLS) Light The Night Walk. Our efforts will help fund the research of such treatments as targeted therapies that zero in on cancer cells and kill them or immunotherapy drugs that use a patient's own immune system to kill cancer.

Some of the big news of the past week has involved tax evasion, both potential and proven. Let’s dive right in, shall we?

Trump’s taxes and you: Five questions answered. Last week, the New York Times’s report on their special investigation into the Trump family’s wealth and possible tax avoidance was largely buried by the ongoing Kavanaugh investigation. This week, pundits were able to catch their collective breath and dive into the Times report. [The Hill]

Can I write off employee gifts as a tax deduction? Thanks to the Tax Cuts and Jobs Act, the answer is, “probably not…but…maybe?” The central issue here is the value of the gift. If the gift is valued over a certain (surprisingly small) amount, it qualifies as income for the employee. [Influencive]

Filing taxes on cryptocurrency is still a tricky prospect. The IRS considers virtual currency to be property, treated similarly to stocks. Easy-peasy, right? Think again. Because cryptocurrency is unregulated and standards vary, investors will have to filter their transaction history and differentiate between taxable and non-taxable transactions and activities to determine how much tax is actually due. [CryptoGlobe]

What would Snooki and JWoww say? On Friday, “The Jersey Shore” star Mike “The Situation” Sorrentino was sentenced to eight months in federal prison for tax evasion. His brother Marc was sentenced to two years in prison for his part in the plot. Together, the brothers conspired with their accountant, Gregg Marks, to avoid paying between $550,000 to $1,500,000 in taxes. We hope there will be hair gel in the prison commissary. [Variety]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

If you are holding appreciated property that you are looking to offload, but don’t want to pay income tax on the appreciation right now, then Congress has a solution for you: Qualified Opportunity Zones. This is an incredibly taxpayer-friendly provision that was included in the Tax Cuts and Jobs Act.

Get in the Zone

Congress passed Subchapter Z to entice private investors to invest in low-income urban and rural areas by providing “temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund.” Translation: under this law, an investor may defer any gains from the sale of property to an unrelated party by reinvesting the capital gains portion of the proceeds in a qualified opportunity fund (“QOF”) within 180 days of the sale. The gains are deferred until the QOF is sold or exchanged, with the tax benefits increasing substantially the longer the holding period of the fund (up until December 26, 2026, the law’s tax recognition date). The principal cost portion of the sale proceeds does not need to be reinvested, and there is no tax benefit in doing so.

The best-case tax savings scenario is where an investor reinvests realized capital gains in a QOF by December 31, 2019, and the QOF is held for 10 years. In this scenario, on December 31, 2026 the taxpayer holding the QOF recognizes and includes gain in gross income as calculated to that date. The original reinvested deferred gain is reported and 15% of that deferred gain is treated as additional or “stepped-up” basis. This reduces the amount of the original reinvestment to be taxed by the 15% stepped up basis. Thereafter, if the fund is held for the full 10 years, no additional capital gains will be recognized. But the law contains other requirements and lesser tax savings scenarios that make the Qualified Opportunity Zones a tax savings opportunity that should not be overlooked, even if a shorter holding period is desired.

What is a Qualified Opportunity Fund?

A QOF is an investment vehicle designated by IRS guidelines and qualifications. No approval or action by the IRS is required to establish a QOF. The fund self-certifies and can be a partnership, corporation, or limited liability company. QOF requirements do include some technical guidelines. For example, the fund must hold at least 90% of its assets in QOZ Property (“QOZP”). QOZP includes QOZ stock, a QOZ partnership interest, or QOZ business property in a Qualified Opportunity Zone. QOZP must be acquired after December 31, 2017 in exchange for cash.

A qualified zone business owns or leases substantially all of its tangible property in QOZ business property and generates 50% of its income from active trade or business with “less than 5% of the average of its aggregate unadjusted bases of the property of such entity attributable to nonqualified financial property.” Investments in certain “sin” businesses are not eligible investments. A penalty is assessed each month the QOF fails to meet compliance requirements referred to above.

What is a Qualified Opportunity Zone?

A QOZ is an economically-distressed area where under certain conditions, new investments may be eligible for preferential tax treatment. Governors were asked to nominate low income urban and rural areas for Treasury approval to become QOZs. The current list of designated QOZs can be found here: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

Death and taxes? Perhaps not: deferral and abatement

The primary benefit of investing in an QOF is the deferral of reporting taxable gains. Because QOF investors are reinvesting the capital gains portion only and deferring the tax to a future date, their initial reinvestment has no cost basis. An investor who holds a fund for a minimum of five years and initiates the investment by December 31, 2021 will be deemed to have a basis equal to 10% of the reinvested funds on December 26, 2026, the law’s tax recognition date. In other words, by satisfying the investment date and holding period requirement, $100,000 invested in a qualified fund with no basis now qualifies for a deemed $10,000 stepped-up basis. And due to the deemed basis, the taxpayer pays tax on only $90,000, instead of $100,000. For an increase in the tax savings benefits to be considered, the reinvested capital gains must be invested in a QOF by December 31, 2019 and held for seven years. If the Fund invests by year end 2019 and satisfies the seven-year holding period requirement, the investment qualifies for a 15% stepped-up basis. If the fund is held ten years, the basis is stepped up, and deemed to be equal to the fair market value. Therefore, after ten years, no tax is paid on the appreciation of the gains reinvested in the fund. Sweet, sweet tax benefits!

Tax planning considerations

Subchapter Z presents real estate developers an opportunity to establish a fund in order to generate third-party investment capital for their projects. But! QOFs that choose real estate as a primary holding in the fund must meet mandated rehabilitation requirements. For real estate investors with large gains considering a 1031 exchange, the opportunity fund is a viable alternative option in that it requires only gain to be reinvested. However, additional cash invested will be treated separately and will not be eligible for the capital gain exclusion.

Bottom line? The alternative capital gain tax deferral option offered by the fund vehicle is more liquid than reinvesting in another real estate property. In the least favorable scenario, if an investment is held fewer than five years, the gain is deferred until the sale, but no gain is excluded.

Is Subchapter Z right for you? Contact your CPA or trusted advisor to make that determination.

Today is National One-Hit Wonder Day, and we’re celebrating by kung fu fighting and doing the Safety Dance. But enough tubthumping—we’ve got plenty of tax news to share.

$77 million is missing. Kevin Garnett has filed a federal malpractice lawsuit against an accountant and his firm, alleging they helped a wealth manager steal $77 million from the retired Minnesota Timberwolves and Boston Celtics star. [NBC Sports]

Charitable giving: how to save tax deductions despite new law. A feasible workaround for the new SALT deduction limitation? [Forbes]

Dubai Department of Finance launches blockchain-based payment system for UAE government. The new platform, called “Payment Reconciliation and Settlement,” was officially launched Sunday, September 23. It is reportedly geared towards government entities, such as the Dubai Police, Roads and Transport Authority (RTA), Dubai Health Authority (DHA), and others. [Cointelegraph]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

In June of 2018, the Supreme Court rendered their Wayfair Decision, apparently giving states license to much more aggressively legislate sales tax laws for out-of-state vendors. With the longstanding and archaic physical presence standard seemingly abolished, states and their local jurisdictions were granted a method of increasing tax revenues without going through the unpopular process of raising tax rates, but instead increasing their tax base. What a concept!

Obviously, businesses dealing primarily in interstate retail sales were most upset to hear this news. Cost of compliance with respect to registering to do business and perpetually filing various tax returns in many jurisdictions can be burdensome. In addition, states might seek to retroactively impose tax on prior-period sales, opening an unanticipated floodgate of tax, penalties, and interest. Smaller businesses that lack the infrastructure to deal with these compliance matters are particularly vulnerable. Since sales and use taxes are “trust-fund” taxes and business owners can be held liable, the exposure for businesses in these areas could be crippling.

Arguably, the primary concern over the Wayfair decision is the uncertainty left in its wake. Some states have acted quickly to pass laws aiming to scoop up as much cash as possible as quickly as possible. Business aren’t sure if they should scramble to register now and begin filing returns and collecting sales tax or if they should take a wait-and-see approach.

Luckily for businesses, Congress has stepped in to save the day (you don’t hear that very often). A bipartisan bill with a good chance of passing was introduced in the house (you don’t hear that very often either) called the “Online Sales Simplicity and Small Business Relief Act.” What the bill lacks in naming creativity, it makes up for in substance. The bill seeks to clear up problems and provide structure and order left in the pandemonium created by the Court’s decision.

The bill sets a cut-off date for sales prior to June 21, 2018; no sale tax collection on transactions prior (which is the date the decision was rendered). It calls for a phase-in of compliance beginning in January of 2019. It also establishes a small business exemption for sellers with gross annual receipts of less than $10 million per year. Lastly, the bill seeks to compel states to work together to develop a “compact” that defines what gives rise to nexus and decreases the burden of compliance on taxpayers.

Hopefully this shred of sanity in such a chaotic time will survive our legislative process and become law. Either way, businesses that have out-of-state retail sales should take steps to identify potential exposure in applicable jurisdictions, paying special attention to those states that have already passed legislation that ignores the physical presence standard and act accordingly.

Annnnnd we’re back, with tax withholding, pot-smoking CEOs, IBM Blockchain, and a fat little wombat who just wants to play.

Millions of taxpayers could wind up owing for 2018. Regular “Wake Up” readers may recall previous articles on this topic. The takeaway? Review your current withholding and make any necessary adjustments as soon as possible. [CBS News]

Tesla’s new Chief Accounting Officer David Morton resigns just weeks after joining the company. Things have been weird lately for the electric vehicle maker. Iconoclastic founder and CEO Elon Musk tweeted plans to take Tesla off the public stock market, only to reverse his plan days later. (The SEC is investigating both announcements.) Musk has a documented history of abusing the prescription drug Ambien and appeared on Joe Rogan’s webcast while smoking what appeared to be a joint. So we kind of get why Morton didn’t want to stick around. [New York Times]

“Should I pay my taxes with a credit card?” Depends on your situation and the type of card you use. [ThePointsGuy.com]

IBM to use blockchain to help consumers control the use of their personal data. In an attempt to help stem the current onslaught of data breaches and cyberattacks, the global technology firm has announced that it is providing the IBM Blockchain Platform to “enable consumers to exercise control over the use of their personal data.” IBM was an early adopter of blockchain as a means of creating an infrastructure for processing millions of transactions per second. [Venture Beat]

This week’s videos

Geni Whitehouse talks about "Leading from Within: The Basset Hound versus The Nun" as part of the TEDxNapaValley "Empowering Leadership at Every Level" event. Geni Whitehouse, CPA.CITP, CSPM is the is the author of "How to Make a Boring Subject Interesting : 52 ways even a nerd can be heard".

During a cool morning shower by a brave ranger, this chubby Wombat (26 kilos!!) is in for either an innocent play or a deadly attack! First time we've ever seen a jumping wombat, anyway!

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

It’s been a year since the Equifax data breach, impacting 147 million Americans and widely considered to be the largest consumer data breach in U.S. history. Because Equifax didn’t use strong, consistent encryption methods to protect the data they stored, hackers were able to locate and exploit a known bug in the Equifax framework to steal this information. Data breaches aren’t uncommon; several national corporations, including Home Depot and Target, have been hacked in recent years. There isn’t much we can do as individuals to control how these large companies and institutions protect our financial and personal data, but we can take steps to guard against breaches at home. Specifically, we’re going to look at phishing scams and how to avoid being tricked.

Phishing is a form of cyber attack in which the hacker tries to obtain your information by tricking you into disclosing it yourself. They can do this by contacting you in any of several different ways:

Email (both work and personal)

Text

Social media (Facebook Messenger, Instagram, Twitter, LinkedIn, etc.)

Phone

Via email: A phishing email works in one of two ways: convincing you either to disclose your sensitive information or to click on a link or attachment that contains malware. SPOILER ALERT: Your bank/credit card company will never email you to verify your password or account information. Neither will Amazon, eBay, Apple, Microsoft, the IRS, or pretty much any other institution. They will not send you attachments, so don’t click on any.

Via text: Gmail, Hotmail, and Yahoo never ask if you don’t want to do something with your account. If you receive a text asking you about a password reset on your account and you didn’t request to reset the password, ignore the text. Don’t even reply—that will only let the scammers know they reached a working cell phone number so they can try again.

Via social media: There have been reports of Facebook users receiving messages from their contacts that consist of an .SVG image file that looks like a photo. Clicking on the file redirected the users to a fake YouTube page with prompts to add “browser extensions” in order to view the video. When users clicked the prompts, they inadvertently installed malware on their computers that allowed the scammers access to all the users’ Facebook friends. Similar scams have appeared on Instagram, Twitter, and LinkedIn. There are other social media phishing attempts out there, but this is the current big one.

Via phone: If you get a call from Microsoft, the IRS, China, etc.—you’re not getting a legitimate call. Hang up and, if you can, block the number.

Also: Attacks have been reported on Venmo and PayPal digital payment accounts. In the most common attack, the user (you) receives a legitimate-looking text or email that claims there’s been suspicious activity on their account and directs the user to provide updated information to avoid fraudulent charges. Another popular method does essentially the same thing but tells the user “Your payment could not be completed,” and prompts the user to provide the information. Pretty sneaky, right?

Be paranoid. Never login to any website you reach by clicking a link in an email. Even if it looks authentic. Even if it doesn’t look like a link—for instance, a button in the email that says, “Verify information now.” The button is a link and clicking it will not end well for your security.

Lessons to live by

Do not trust the link.

No legitimate request for your username/password will come through an unsolicited email or text.

If you’re not expecting an email and you know the sender: call or text them. If you don’t have their number, use a different email or messaging program to ask them if they really sent it. Do not reply to the email.

If you’re not expecting it and you don’t know the sender: delete it. Better safe than sorry.

Awareness is key. Scammers are shrewd, but you don’t have to be tech-savvy to outwit them.